It’s almost never openly admitted in public, but the reality is that few if any investors actually beat the market in the long-term.

The reason for this is that most of the investment strategies employed by investors (professional or amateur) simply do not make money.

I know this runs counter to the claims of the entire financial services industry. But it is factually correct.

In 2012, the S&P 500 roared up 16% including dividends. During that period, less than 40% of fund managers beat the market. Most investors could have simply invested in an index fund, paid less in fees, and done better.

If you spread out performance over the last two years (2011 and 2012) the results are even worsen with only 10% of funds beating the market.

If we stretch back even further, the results are even more dismal. For the ten years ended 1Q 2013, a mere 0.4% of mutual funds have beaten the market.

0.4%, as in less than half of one percent of funds.

These are investment “professionals,” folks whose jobs depend on producing gains, who cannot beat the market for any significant period.

The reason this fact is not better known is because the mutual fund industry usually closes its losing funds or merges them with other, better performing funds.

As a result, the mutual fund industry in general experiences a tremendous survivor bias. But the cold hard fact what I told you earlier: less than half of one percent of fund managers outperform the market over a ten-year period.

So how does one beat the market?

Cigar Butts and Moats.

“Cigar butts” was a term used by the father of value investing, Benjamin Graham, to describe investing in companies that trade at significant discounts to their underlying values. Graham likened these companies to old, used cigar butts that had been discarded, but which had just one more puff left in them.

Like discarded cigar butts, these investments were essentially “free”: investors had discarded them based on the perception that they had no value.

However, many of these cigar butts do in fact have on last puff in them. And for a shrewd investor like Benjamin Graham, that last puff was the profit potential obtained by acquiring these companies at prices below their intrinsic value (below the value of the companies assets plus cash, minus its liabilities).

Graham used a lot of diversification, investing in hundreds of “cigar butts” to produce average annual gains of 20%, far outpacing the S&P 500’s 12.2% per year over the same time period.